The crypto industry is mounting a significant challenge to the U.S. Treasury’s proposed regulations, aimed at aligning crypto reporting standards with those of traditional financial instruments. Industry leaders argue that the regulations, as they stand, could stifle innovation and infringe on constitutional rights.
A wave of opposition
Since the Treasury, in conjunction with the Internal Revenue Service (IRS), proposed regulations in August to treat crypto brokers similarly to traditional brokers, the response has been overwhelming. Over 124,000 letters, many from key industry players, have poured in, voicing concerns and objections. The sheer volume of responses, including 2,000 in just the past two days, highlights the depth of the industry’s apprehension.
Marisa Copel, senior counsel for the Blockchain Association, articulated the industry’s stance during a recent IRS hearing. She stressed that the proposal’s broad scope, particularly towards decentralized finance (DeFi), is problematic. According to Copel, DeFi protocol developers and non-custodial wallet creators cannot feasibly comply with these rules, as their platforms facilitate direct user-to-user connections without acting as transaction intermediaries. Compliance, in this case, would necessitate abandoning the decentralized technology that defines their uniqueness. Copel warned that this could either drive U.S. based decentralized projects abroad or force them to cease operations altogether.
Further complicating the situation are constitutional concerns raised by the proposal, including vague definitions and privacy issues. Copel urged a more phased approach, starting with centralized trading platforms before engaging DeFi participants to find workable solutions.
A call for balanced regulation
While the crypto sector largely opposes the proposed regulations, some voices within the industry acknowledge the need for oversight. Ryan Leverett, a tax preparer at a small firm, emphasized during the hearing the prevalence of bad actors within the crypto space. Leverett highlighted infamous examples like FTX, where reduced regulations allowed for significant customer and investor exploitation. He argued that the proposed regulation is a step towards reining in the “Wild West” of digital assets.
The Defi Education Fund, in its letter, criticized the proposal for stretching the broker definition beyond constitutional limits, potentially treating every blockchain participant as a broker. CEO Miller Whitehouse-Levine described the proposal as “confusing, self-refuting, and misguided,” suggesting it undermines Congressional intent and Constitutional protections.
Individual respondents also weighed in, with some advocating for a balance between transparency and privacy. The consensus among these voices is the need for regulations that respect personal information while ensuring the integrity and safety of digital asset transactions.
The Treasury’s proposed regulations have ignited a crucial debate on the future of cryptocurrency regulation. While there is general agreement on the necessity of oversight to prevent fraud and enhance market integrity, the crypto industry insists that regulations must be nuanced and tailored to the unique nature of digital assets. The challenge for regulators will be to strike a balance that safeguards both the innovative potential of cryptocurrencies and the rights and privacy of individuals participating in the crypto sector.